Have you heard people declare, ‘interest rates are incredibly low’ lately? They aren’t wrong. While the pandemic caused havoc physically and financially, it’s had some positive effects too, including low interest rates.
If you haven’t taken advantage of today’s low rates, now’s the time. Here’s why.
The Fed Lowered Rates
The Fed lowered the Federal Rate, which technically isn’t tied into mortgage rates. But, usually, when the Fed drops rates, there’s a problem in the economy. They get money moving by lowering rates. While mortgage rates while aren’t directly related, they follow suit.
If you got excited when you heard the Fed lowered the rate to 0%, it was premature. Mortgage rates came down, but it took a while. While they aren’t 0% low, they are low compared to this time last year and the years leading back to the subprime crisis.
How long rates will stay here no one knows. With the Coronavirus sticking around for the foreseeable future, chances are good that rates will remain low. This gives you plenty of opportunities to take advantage of the low rates.
How Should you Use the Lower Rates?
How you use the rates determine how much you save. Here’s why.
Low rates mean more affordable payments. What if you took it a step further? Let’s say you have a 30-year mortgage now. The new rates lower your payment quite a bit. But, what if you look at the 15-year rate and payment? Lower rates may mean affording a shorter term.
When you shorten the term, you do a few things:
- Your payment increases, but only because you pay more principal than interest
- You own the home in half the time
- You pay less interest over the loan’s lifetime
If you can’t afford the 15-year payment even with lower rates, look at the 20 and 25-year payment. Knocking even a few years off your term helps you own your home faster and pay less money out of pocket in interest.
If your comfort level lies with the 30-year term, go for it, but see what you can do to make extra payments toward the principal.
Ways to Refinance
Think not only of the term but also the reason for refinancing too. A rate/term refinance focuses only on the loan’s rate or term (lower the rate or shorten the term). You have other options too:
- Cash-out refinance – If you owe less than the home’s value, take cash out, and use the equity. Many people pull the funds out and keep them in an emergency fund. The pandemic caused financial distress for millions, so if you have equity, it’s a great time to tap into it and prepare yourself.
- Home equity loan – You don’t have to refinance your first mortgage. If you’d rather leave it and take out a second lien, now’s a great time. With low rates, you may afford a higher payment, taking more equity out of your home. Most lenders let you borrow up to 80% of the home’s equity.
- Change the type of rate – Get rid of your adjustable-rate and lock in a low fixed rate now. You may save money and don’t have to worry about an adjusting rate anymore.
What to Consider Before Refinancing
2021 is the best time to refinance. It’s hard to imagine rates getting any lower and banks have lenient guidelines right now, especially with property requirements with the social distancing requirements in place.
Before you refinance, consider the following:
- How much will you save? Look at your payment and the total cost of the loan. Include the closing costs. Are you saving enough? Compare loans from different lenders. Each lender charges different fees. Look at the big picture before deciding.
- What are the lender requirements? Coronavirus changed how lenders process mortgages. Some still require in-person appraisals and others allow a drive-by or automated appraisal. Many lenders loosened their employment verification requirements too, as many companies are still operating at home. Work with a lender that has requirements you meet.
- Can you afford the payments? If you shorten your term, make sure the payment is affordable. Think of the worst case scenario. What if you lose your job or you become ill? Can you afford it or will it stress your finances too much? Look at all aspects before deciding.
2021 is a great time to refinance as rates fall and lenders have more lenient guidelines. Look at the big picture. Will you save money monthly and over the life of the loan? If so, hop on board and refinance like millions of other Americans, preparing themselves for another wave of the pandemic crisis.